Listed REITs — or real estate investment trusts — experienced a turbulent 2023, with upsides and downsides.

Cohen & Steers Head of Real Estate Strategy and Research Rich Hill joins Yahoo Finance Live to discuss the outlook on REITs amid certain real estate pressures, including the state of commercial real estate.

"There are around 18 different sub-sectors within the listed REIT umbrella... that can behave differently at different points in time," Hill explains. "What do we like? We like things like data centers right now, we think data centers are going through a huge growth boom at least driven partially by AI."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

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JOSH LIPTON: Commercial real estate is putting a lot of strain on banks with many CRE loans being more than the property values themselves. But our next guest says the real estate investment trust market is an interesting play after finishing strong in 2023, despite negative CRE headlines. For more on what investors should be looking for in the 2024 REIT market, we bring in Rich Hill, Cohen and Steers head of real estate strategy and research.

Rich, it's always good to see you. It's a new year, people are thinking about making changes to their portfolios. Maybe they're thinking about adding in REITs. Maybe just broadly to start with, as you look now to 2024 to the REIT market, does it look strong, healthy, bullish?

RICH HILL: Yeah, sure. Well, maybe I can just recap a little bit what happened in 2023, because I think it's useful to look back as we start to look forward. Look, the reality is listed REITs had a pretty solid year. They were up more than 11%. And I think if you told many people that was going to occur this time last year when we were facing five bank failures and, oh, by the way, 10-year Treasury rates hitting 5%, I'm not sure many people would have believed you.

And certainly, it was a wild ride for listed REITs in 2023. They were up 10% in January. They were down more than 10% year-to-date in October. And they finished up 11% for the year as I mentioned to you. But I think what you're really dealing with here is three important points.

First of all, we've always said that recessions create attractive entry points for listed REITs with the very best returns coming when we transition from recession to early cycle. We think that's occurring. The second thing that's happening, which is really important, is that the very best returns for listed REITs usually come in the aftermath of the Fed stopping hiking interest rates, which we think we're on the precipice of. And the third point here is that listed REITs are a leading indicator for the private market and both downturns and recoveries.

So we think listed REITs have priced in a lot of the headwinds that are facing the broader commercial real estate market. And you'll continue to see a lot of headlines about that in the year ahead.

JULIE HYMAN: Rich, all listed REITs are not created equal. So where are you seeing the most opportunities right now within REITs?

RICH HILL: Yeah, sure. So it's a great question. And I think there's really two big misconceptions about listed REITs. First of all, that they don't have strong balance sheets. They do have strong balance sheets. LTVs, Loan To Values, are less than 35%. We focus on that a lot.

The second point is that office, which dominates a lot of media headlines, is a big portion of listed REITs. They're only around 3% of REIT market cap. So that brings me to your question. There are around 18 different subsectors within the listed REIT umbrella. People like to focus it as one singular asset class but it's really different 18 different subsectors that can behave differently at different points in time.

What do we like? We like things like data centers right now. We think data centers are going through a huge growth boom driven at least partially by AI. We're a big believers in single family rentals. There's not enough housing in the United States. Buying a home is really expensive. Renting a home is not too cheap as well. So we like single family rentals. We like things like seniors housing. And believe it or not, we like high quality owners of regional malls as well. So there's always an opportunity to find value in the listed REIT market.